Knowledge Expansion

Establishing the value of goodwill using the excess earnings method

Insight Article

Budgeting

Provider Compensation

The financial value of a medical practice is composed of two parts:

  1. “Goodwill” — an intangible value associated with the name and reputation of the medical practice
  2. The current value of the hard assets (clinical, administrative and IT equipment) of the practice, not including real estate. The valuing of hard assets is fairly straightforward, but the value of goodwill is difficult to assess objectively.

The two most common methods of establishing the value of goodwill have significant drawbacks. The comparable sales and income approaches are complex, often based on data spanning several years and geographic areas, and sometimes use a discount rate to value future cash flows that may not be accurate in a time of fluctuating interest rates. 

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About the Author

Robert L. Chiffelle
Robert L. Chiffelle
Principal HSC Management Phoenix, Ariz.

rchiffelle@cox.net.

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